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Heterogeneous beliefs and approximately self-fulfilling outcomes

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  • Gabriel Desgranges
  • Sayantan Ghosal

Abstract

When are heterogenous beliefs compatible with equilibrium and if not, which non-equilibrium outcomes do they lead to? In this paper, we examine the conditions under which heterogenous beliefs lead to approximately self-fulfilling outcomes consistent with all that is commonly known by each agent via an iterative elimination process. We develop a formal definition of approximately self-fulfilling outcomes, p-consensus, and an associated, continuous measure of the degree of stability of equilibrium, p-stability. Applying our concepts to intertemporal trade in a two period economy, we examine how heterogenous beliefs and heterogenous preferences interact to create to asset price bubbles.

Suggested Citation

  • Gabriel Desgranges & Sayantan Ghosal, 2021. "Heterogeneous beliefs and approximately self-fulfilling outcomes," Working Papers 2021_07, Business School - Economics, University of Glasgow.
    • Handle: RePEc:gla:glaewp:2021_07
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    References listed on IDEAS

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    1. Ghosal, Sayantan, 2006. "Intertemporal coordination in two-period markets," Journal of Mathematical Economics, Elsevier, vol. 43(1), pages 11-35, December.
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    7. Evans George W. & Guesnerie Roger, 1993. "Rationalizability, Strong Rationality, and Expectational Stability," Games and Economic Behavior, Elsevier, vol. 5(4), pages 632-646, October.
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    More about this item

    Keywords

    p-consensus; p-stability; equilibrium; rationalizability; heterogeneous; beliefs; preferences; games; markets;
    All these keywords.

    JEL classification:

    • C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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